New Zealand officially in recession as GDP falls for second quarter
New Zealand officially in recession as GDP falls for second quarter
The latest data on gross domestic product shows New Zealand's economy is now officially in recession.
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One big question I have is where is the money going?
This is a complex question but the first part is that this is intentional, the RBNZ were aiming for a minor recession. They do this by raising interest rates.
People and businesses get money by borrowing it from the bank. The bank gets it from deposits and borrows it from other banks, but they can also get unlimited money from RBNZ. Since COVID, the banks have been able to borrow money really cheap, at a point we were talking 0.25% interest. This means huge demand for money, because businesses can expand using money they borrow while borrowing is cheap. It also means skyrocketing house prices, because there is a lack of housing supply. Lack of supply means you have to pay as much as you can afford to beat someone else, because there aren't enough to go around. When borrowing money gets cheap, house prices skyrocket.
So the first part of the answer is that the money never really "existed", because banks can get as much as they like at any time. So when someone complains about the government " printing too much money causing inflation ", they may not be wrong, but first you need to check what it is they mean by "printing too much money". Often people think this means the government provided too much COVID support, but I think we should challenge this assumption (though it may be right or wrong).
The next part is "what is GDP"? GDP is a measure of the output of an economy. For example, if I have a company making cupcakes. I might get $2 per cupcake and make a million cupcakes a year, if I can sell them all then that would add $2 million to the GDP. I then take some of my profits, and go to the pub. The pub sells me a (small) beer for $10. That beer came from a brewery up the road, so that adds another $10 to GDP. But note we already counted this money, because I received it selling cupcakes. So GDP is about counting how much money moves rather than how much money total there is.
Now let's say demand for cupcakes overseas goes down. Suddenly I can only sell half as many cupcakes, so GDP goes down. Then I can't afford to keep my staff so I make some redundant. Other industries are having the same problem so they make their staff redundant. People have less income, so they can't buy cupcakes without disposal income. This means profits drop further, and I can't afford a beer. This means the pub closes as there aren't customers. GDP is falling and it wasn't really anyone's fault.
Another scenario is that people think hard times are coming, so instead of buying cupcakes they put their money in the bank to prepare for the hard times. Money in the bank isn't moving through the economy, so this also causes GDP to drop, despite the same money still "existing".
TL;DR: money doesn't really exist, and even if it did, GDP measures the movement of money, not the total amount.
I have surely got some details wrong in this so if anyone is an economics expert, feel free to correct me.
Isn't a decrease in housing prices also impacting GDP?
I'm pretty sure the sale of an existing house is not counted in GDP, which is the vast majority. This is because no goods were produced and the house itself is not a service.
However, the lawyer and real estate agent fees I think are counted, as well as e.g. paying for a builder's report, registered valuation, etc.
I'm not certain on new houses, but I expect they would be included. So this could impact GDP, but it's probably minimal since most house sales are not of new builds, and also I believe new build values haven't fallen as much as others (since investor rules are different, and also the price to build sets a minimum sale value).
I heard people say 'real estate artificially inflates GDP' but I have no idea if that's true.
Capital gains, maybe?
Most of the time people are probably making assumptions that may not be true. However, I think a new house counts. While borrowing is cheap, more new houses are built, and the competition for land for new houses pushes up prices. So it's possible it has skme impact, but it really depends on how exactly NZ (Stats NZ?) counts it. I would expect the land value to not be included but maybe it is, I haven't managed to find a list of what is and isn't included in GDP.
Rising housing costs are counted in inflation numbers, though.
Edit: you may be right about capital gains, it means more spending money for the sellers (and the buyers pay with debt so the drop on that side is delayed)
The fun part where we like to think of money as being this stable measuring stick, but the value of money itself changes.
Corrupt politicians and businesses. Same as it every was. Just look at the handling of cyclone relief. Some companies aren't getting any money while companies not even in Hawkes Bay area getting pay outs.
Money for the rich and never for those that actually need it. Bureaucracy at its finest
You've answered the question about where money goes in general, but that doesn't explain why GDP is falling. Corrupt politicians giving too much money to companies they are involved with still contributes to GDP.